SEC Cracks Down on Silicon Valley’s “Disruptive Tech”

“It’s an important lesson for Silicon Valley,” said SEC’s Jina Choi. “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth….”
By Jan Bauer, Safehaven.com:
The SEC has laid fraud charges against the CEO of a company that once had a $9-billion valuation and was a darling of Silicon Valley thanks to its portable blood analyzer which claimed to be so revolutionary it was used by the Department of Defense on the battlefields of Afghanistan.
Except that it wasn’t, and now the U.S. Securities and Exchange Commission is striking back with massive fraud charges.
On Wednesday, Elizabeth Holmes, the founder and CEO of Theranos was charged for running an “elaborate, years-long fraud” by the SEC, which accused her and partner Ramesh “Sunny” Balwani, of having “allegedly deceived investors into believing that its key product—a portable blood analyzer—could conduct comprehensive blood tests from finger drops of blood.”
The DoD, it turns out, never used Theranos products or its purportedly proprietary technology, though it was at one point touted by U.S. Central Command head General Jim Mattis, who later joined the Theranos board before becoming U.S. Secretary of Defense.
According to the SEC, “Holmes, and Balwani claimed that Theranos’ products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100 million in revenue in 2014. In truth, Theranos’ technology was never deployed by the U.S. Department of Defense and generated a little more than $100,000 in revenue from operations in 2014.”
“It’s an important lesson for Silicon Valley,” SEC San Francisco direction Jina Choi said in a separate statement. “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”
According to the SEC, Holmes raised more than $750 million between late 2013 and 2015 on fraudulent claims. But in reality, the SEC alleged, “Theranos was able to process just a small number of blood tests upon its proprietary analyzer, and instead conducted the vast majority of its patients’ tests on modified commercial analyzers that were manufactured by others.”
The SEC charges come two years after an investigation prompted by the Wall Street Journal.
So what happens now, other than a lesson for Silicon Valley that not even a handful of big names with military might can keep the regulators off your back?
Holmes will pay a $500,000 penalty and give back the 18.9 million shares in Theranos that she managed to collect along the way. She is also set to be banned from serving as an officer or director of a public company for 10 years. It’s a major fall from grace for a high-school drop-out who became a fast start of Silicon Valley before falling from grace just as quickly.
Holmes, 34, won’t be the only target, either. The SEC said it would also pursue Balwani, noting that this was a “two-person operation, where Holmes and Balwani exclusively controlled Theranos. They were responsible for all of the misconduct alleged in this compliant.” Neither Theranos nor Holmes has admitted or denied the SEC allegations against them. By Jan Bauer, Safehaven.com
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